Following last week’s CPI report for January that reflected an inflation rate of 6.4%, higher than expected and only slightly less from 6.5% in December, Core Personal Consumption Expenditure (PCE) data was released this week. PCE, the central bank’s preferred inflation measure,  unexpectedly increased 0.6% in January from December. Meanwhile, consumer spending surged 1.8% last month, the biggest increase in nearly two years. The mixed signals hammered the stock market promptly.

U.S. Treasury yields rose in response, with the 2-year note climbing to 4.78% and the benchmark 10-year yield rose to 3.95%. For the week, the Dow Jones dropped 3% for its fourth straight losing week, the S&P 500 shed 2.7% in its worst week since early December, and the Nasdaq sank 3.3%.

Future Wealth’s View

Despite strong consumer spending, cracks are appearing in the retail segment. Both Walmart and Home Depot cautioned, in their Q4 earnings calls this week, on slower spending in the upcoming quarter as consumers’ savings continue to deteriorate to pre-pandemic levels and credit card debt climbed rapidly once again. We, at Future Wealth LLC, view this as consumers being in denial that the recession is coming soon and not curtailing spending fast enough even as layoffs are becoming rampant.

This optimism was reflected in the ill-advised January rally of growth stocks. The penchant for risk taking has quickly faded in February as all the economic data is pointing toward sticky inflation, climbing unemployment, higher interest rates and more pronounced layoffs, eventually leading to a recession.  In anticipation of a slowdown, in early 2022, we began moving our client portfolios to value stocks away from growth stocks and more recently, shifted even more into safe havens – TIPS, CDs and Munis. Investors who are passively watching their portfolios get hammered would do well to begin to take action quickly.

In another case against passive investing, Fidelity revealed that the average loss in 401K accounts in 2022 was around 20%. The pain was greater for investors with bigger 401K accounts with the number of retirement accounts with $1 million or more falling by a whopping one third. And the outlook isn’t much better for 2023, as the stock market continues to battle with lingering inflation. The cardinal error that most investors make with their 401K accounts is not reviewing the allocation on a regular basis, especially in volatile times. While we, at Future Wealth LLC, do not directly manage our client’s 401K accounts, we make it a point to review and recommend changes to allocations  during our quarterly reviews with our clients.

While no one can accurately predict the timing of a recession, we look at ex-Fed Chair – Alan Greenspan’s favorite metric – underwear sales. People buy this basic item year round but put off new purchases in a downturn. Recent data reveals that 2022 saw a slowdown in men’s underwear sales and 2023 sales is expected to be worse. You be the Judge.